Best business loans for bad credit

What is bad credit?

Bad credit refers to low credit scores that indicate a higher risk of defaulting on loans or other obligations. Lenders look at both your personal and business credit for small business loans. You need decent scores on both sides, although personal credit tends to weigh more heavily for startups and younger companies with limited financial history.

Personal credit score

For personal credit, a FICO score in the “fair” or “poor” range is generally considered bad.

Business credit score

Business credit scores are calculated by bureaus like Dun & Bradstreet, Equifax and Experian based on a company's payment history, amounts owed, length of credit, new credit and public records. Scores typically range from 0 to 100.

Higher scores indicate low credit risk and timely payment of bills and loans. For instance, an Experian business credit score of 26 to 50 represents medium risk of delinquent or defaulted payments. For Dun & Bradstreet, a score of 1 to 79 represents fair to bad credit.

Lower scores reflect late payments, defaults, bankruptcies and high debt — and signal high risk.

» MORE: How do business loans work?

Types of bad credit business loans

Having strong credit shows lenders you’re reliable and less of a risk. Poor credit can suggest potential problems repaying your loan. As such, bad credit makes it much harder to qualify for affordable loan rates and terms.

Still, there are business loans for bad credit that you might qualify for.

Business lines of credit

Best for: Covering emergencies and cash flow gaps

Business lines of credit provide quicker access to capital compared to applying for new term loans each time you hit a slow period or face an unexpected expense.

Lines of credit allow businesses to only take on debt when funds are actually needed. On the downside, the variable interest rate means your monthly payments can fluctuate. Fiscal discipline is essential to avoid overspending and becoming over-leveraged.

Equipment financing

Best for: Buying machinery and equipment

With equipment financing, rather than paying the full equipment price upfront, you can finance it over a set repayment term.

Equipment financing loans typically have fixed interest rates and terms ranging from two to seven years. Collateral is usually required in the form of the equipment itself. You may also need a down payment for equipment financing.

Invoice factoring

Best for: Businesses that are comfortable borrowing against unpaid invoices

Invoice factoring allows businesses to sell those unpaid invoices to a factoring company to receive immediate cash. This provides access to capital based on the value of your invoices rather than your credit score.

The factoring company effectively lends you money by buying the invoices at a discount, then collects the full amount later from your customers. But the discount fees can get expensive over time. And your clients will need to be in good standing to get approved.

Microloans

Best for: Startups that need less than $50,000

You can use microloans for working capital, equipment, inventory and other startup costs, and the application process tends to be simple and fast. Interest rates are low, but loan amounts max out at $50,000. Repayment terms are shorter as well — usually five to seven years.

Revenue-based financing

Best for: Businesses that generate a large amount of revenue

Revenue-based financing lets you borrow against future sales. Repayment terms are flexible — you repay a fixed percentage of your monthly revenue until the loan is paid off.

This type of financing is accessible even with poor personal credit as long as your business has healthy revenue and growth potential. However, the repayment percentage can be high, often between 1% and 3% of total revenue.

Short-term loans

Best for: One-time expenses that can be repaid quickly

Short-term loans provide fast financing that must be paid back within three to 18 months. The short repayment period allows lenders to offer these loans to higher-risk borrowers with poor credit.

Just be cautious of very high interest rates and daily or weekly repayment schedules. Read the terms closely and have a plan to repay on time, as defaulting could hurt your credit further.

» MORE: Types of business loans

How to choose a bad credit business loan lender

Use these tips for choosing a bad credit business loan lender:

• Check interest rates and fees. Compare rates across multiple lenders, as a higher credit risk means you may pay more. Watch out for very high rates or excessive origination fees that could trap you in a cycle of debt.
• Review qualification criteria. Each lender will have its own requirements regarding time in business, revenue, collateral and credit score minimums. Choose one with criteria you're more likely to meet.
• Look for adjustable terms. Seek lenders that offer more customizable loan amounts, longer repayment terms, lower collateral requirements and lines of credit. This provides more options.
• Understand the application process. Go with lenders that have an application process that’s easy to follow. Also, look for lenders with fast turnaround times if that’s a priority for you.
• Research customer service. Read online reviews and see what current borrowers say about the lender's customer service and responsiveness. This is key when dealing with smaller lenders.
• Consider specialty programs. Some lenders have specific bad credit business loan programs worth exploring.

» COMPARE: Best business loan companies

How to apply for a business loan with bad credit

Applying for a business loan typically involves submitting an application with details about your company, financial statements and personal credit history. Lenders will review this information to assess your eligibility and risk.

Funding times depend on which type of loan you’re applying for. Online lenders fund some loans in as little as one business day, while Small Business Administration (SBA) loan lenders can take 60 to 90 days.

If you have bad personal credit, getting approved for a traditional bank loan will be difficult. Follow these steps to strengthen your application:

• Check your credit reports and scores. Know exactly what your personal and business credit profiles look like before applying. Look for any errors to dispute and get them fixed.
• Improve your credit if possible. Pay down balances, dispute negative marks and establish new positive accounts. Even marginal improvements can help.
• Choose alternative lenders. Online lenders tend to be more flexible than big banks when it comes to credit requirements.
• Bring on a co-signer or investors. A co-signer with good credit or investors can make your application stronger.
• Use collateral. Putting up business or personal assets as collateral can give the lender more security.

Alternative borrowing options for businesses with bad credit

If your business is unable to qualify for a traditional loan due to poor credit or lack of operating history, there are other potential funding sources to consider.

“Don't think you necessarily need six or seven figures right out of the gate,” said Danielle K. Roberts, a co-founder of Boomer Benefits, an insurance agency. “Look into microloans, crowdfunding or local programs supporting entrepreneurship as ways to build history and credibility with modest financing — kind of crawling before you walk as a business borrower.”

Consider these alternatives:

• Crowdfunding platforms: Crowdfunding allows you to raise small amounts of capital from a large pool of investors. You pitch your business idea and financial needs, and donors contribute small sums in the form of loans or in exchange for future products or rewards. This works best for consumer product companies with an appealing concept.
• Grants: Grants are amounts of money typically given by nonprofit or government agencies and don't need to be repaid. Research options in your industry or location that support entrepreneurship. But just know that grants can be highly competitive, and there may be restrictions on how you can use the funds.
• Personal loans: These loans use your individual credit score versus business score. So if you have good personal credit but your business does not, you can borrow in your own name and invest the money into the company. But interest rates might be higher than with business funding, and your personal assets are on the line if you can’t repay.
• 401(k) loans: With a 401(k) loan, you use some of your retirement savings as a loan to your business, which must be repaid over five years with interest. This avoids credit checks but puts your nest egg at risk, so approach with caution.